Sports Betting: A Panacea or a Mirage

July 27, 2018

By Robert D. Katz, CTP, CPA, MBA

Anticipation! On May 14, 2018, the United States Supreme Court struck down the federal law that prohibited sports gambling, giving states the go ahead to legalize sports betting. If you read and give credibility to all the press coverage, it is going to be the panacea to solve all states' fiscal problems and fill their coffers; something equivalent to Moses parting the Red Sea.

Resorts Hotel and Casino is celebrating its 40th anniversary this year. If you recall it was the first United States casino outside of Las Vegas. This too was going to solve all kinds of issues. Gambling in New Jersey generated many billions of dollars in tax revenue and income for the first 25 years when New Jersey had a monopoly; then other states and Indian Tribes legalized gambling. And quite frankly nobody seems to know where the money went from New Jersey’s quarter century as a gambling monopoly. All you have to do is go to Atlantic City, walk one or two blocks off the Boardwalk and ask “how could the city be in such disarray?"

Truth be told, like most successful companies or organizations, success comes from having great people, with an excellent plan and superb execution, and of course the visionaries to keep it all on track. In fact, since 1984 in Las Vegas, only 5.52% of the casinos' total “win” came from sports betting, according to the Center for Gaming Research at the University of Nevada Las Vegas. What has made Las Vegas so successful is the incremental “other” hospitality revenue it generates, from rooms, dining, entertainment, shows, etc. It also is set up to attract almost every major convention in the country. It attracts people to Las Vegas for the March Madness Tournaments, The Kentucky Derby or similar events that span multiple days. These are conventions that attract more than 100,000 people, and the average visitor stays in Las Vegas for three to four days. The average visitor to Atlantic City, by contrast, stays for just six hours.

Another insight, out west, there is something for everybody. Pardon the cliché. But whether the budget is $500, $5000 or more, there are plenty of other things to do in Las Vegas outside of gaming. The same can't be said of Atlantic City.

As somebody who has watched, tracked, and worked in the Gaming Industry since 1987, the recent law passing presents a fascinating conundrum. Will the people governing Atlantic City have learned from their past mistakes? There are currently seven casinos operating in New Jersey, and two additional ones opened in June. The Hard Rock Casino Hotel invested more than $400 million in the old Taj Mahal Property, and The Ocean purchased the $2 billion Revel property shortly after it exited bankruptcy. Based on the recent past and the city’s current state, it seems unlikely that Atlantic City will be able to support nine properties, so it is likely that two or three will close. And it remains to be seen what impact the recent $1 billion sale of the Tropicana will have.

It has been some time since Atlantic City has had its recent optimism. It recently went through its own restructuring; major investing has recently gained a foothold throughout South Jersey. There has been significant job creation, improving the tax base. To its credit the state has done an exceptional job at increasing its visibility and attracting new investments, like “A” name players such as the Hard Rock, as well as non-gaming organizations like Stockton State University. Speaking of the “A List,” the city has attracted A-list entertainers to Atlantic City this summer as well. So at least for the short term it has created an all-important buzz.

Other states like New York have similar opportunities. The Off-Track-Betting industry, which has always had a fairly significant presence, recently has had struggles because of competition from the newly opened casinos. And yet, some like the Del Lago Casino in the Finger Lakes region are looking for a bailout just 13 months after opening. The panacea may not exist. And yet, I can see the potential. I recently attended the 150th Belmont Stakes. Attendees were in a variety of their Saturday bests. Imagine what that could look like for the Super Bowl, College Bowl season or March Madness; if done right it could be a giant party and revenue generator waiting to happen.

Gambling is based on probabilities and clearly they are not in the gambler’s favor. After all, they aren’t building the brand new beautiful buildings because people win more than they lose. Critics have said that casinos prey on those that can least afford it. By opening sports betting throughout the entire country, does that give the critics' argument more credibility? Time will tell. Again, it's about assessing great “vision” as a key to success. Las Vegas and other gaming meccas understood that the key to future success was diversifying their revenue base; so approximately 50% is generated from gaming and 50% from food, beverage, hotel and entertainment, compared to Atlantic City where over 70% comes from gaming.

What’s Next?

To me, an interesting key to New Jersey’s success will be what happens in the next 120 days.

New Jersey is its busiest during the summer when the shore season is at its peak. There are two new sparkling brands in Atlantic City, and football season is just around the corner. Football is the most popular betting sport. How will New Jersey’s leaders drive people to the shore, and more importantly how will they make the experience memorable; so that in the cold and dead of winter, say November through February (the shore’s slowest time) visitors will want to come back? Complimentaries (free rooms, meals and shows) are always a good driver and enticement, but like any successful business it must generate cash flow, therefore only so much can be given away. Can the leadership take advantage of this opportunity to make it what people hope it can be?

The same leaders and visionaries who grew Las Vegas, created the empire that is now Macau. A decade ago it was an island in the Far East, near China with little activity, but today it is an amazing entertainment mecca, adding jobs and hundreds of millions if not billions of dollars to its economy and the community. That same success could have come to Atlantic City, but that didn't happen and today it is nothing more than a lost opportunity. But it's one that we hope, can be recaptured at least in a small way. So much was made by the media as Governor Murphy and other dignitaries placed the first sports bet on June 14, 2018, at Monmouth Race Course as well as at The Borgata. Hopefully they have invested the time and resources into capitalizing on the potential they let slide by in the first round of Atlantic City gaming.

Like his politics or not, former Governor Chris Christie took on the federal government, navigated through losses and appeals at lower courts and ultimately won at the United States Supreme Court. He put New Jersey and other states in a great position to generate significant tax revenue and position itself for decades to come. However, will they be smart enough and capable enough to take advantage of the opportunity? Will they be able to recapture the city's past without just focusing on the less fortunate? Is Atlantic City better positioned to support a larger casino base or will it be short lived with trouble on the horizon? Will they be able to create success through a diversified approach, or will they focus on just gaming revenue which is easy, but offers less opportunity for overall success. If the past is any indication of the future one may suggest not, but we wait cautiously to see.

Our hope is they will learn from their past mistakes; our fear is they never seem to.

Robert Katz CPA is a Managing Director of EisnerAmper Financial Advisory Services Group, and works with public and private companies, in and out of bankruptcy, to create and execute the strategy needed to restructure or improve operating performance.